Template:20 days notice ISDA
“by not more than 20 days’ notice”
What is the significance of the maximum notice period of 20 days that one may use to close out the ISDA Master Agreement? Poor defaulted Counterparty is in pieces, on its knees, bleeding out, but really, as long as it gets some notice, does it really care how much? Surely the longer the period, the more hope — the chance remains, perhaps, however remote, that things will come right, your counterparty will see sense, or discover that one compassionate bone in its body and, in a bout of terrifying clemency, change its mind? Why deprive it, and yourself of that option?
Now, this is deep ISDA lore. It is of the First Men[1]. As such — since they didn’t have a written tradition back then in 1986; legends were passed down orally from father to son and much has been lost to vicissitude and contingency — it is not a subject on which there is much commentary. That dreadful FT book about derivatives sagely notes that usually notice is given much sooner than 20 days — I mean,. you don’t say — but doesn't give a reason for this curious outer bound. Nor does the User’s Guide to the 2002 ISDA Master Agreement.
One is just expected to know.
Well, companions, just now knowing things is not how we contrarians roll. So, in the absence of a credentialised source for the reason, let us speculate.
Remember the ISDA Master Agreement was invented by banking folk: people who who view the cosmos chiefly through the prism of indebtedness[2]. A lender whose borrower has defaulted will not dilly dally: she will bang in a default notice and seize whatever assets she can get her hand in poste haste. I lend, you owe. I don’t muck about. Breakage costs on a loan are easy to calculate and they are not especially volatile. The longer i take to terminate my exposure and set about recovering, the larger my exposure is likely to be.
But, but, but. ISDAs are different. They are not, principally[3], a contract of indebtedness, and while a large uncollateralised mark-to-market exposure[4] is economically the same as indebtedness, the contract is bilateral, and who is indebted at any time is dependent on the net exposure: it can swing around.
- ↑ I know, I know — or women, but that spoils the Game of Thrones reference, you know?
- ↑ Hence, a Cross Default clause in the ISDA. Well — can you think of another reason for it?
- ↑ This gag comes to you direct from our “here all week, folks!” store of corking one-liners.
- ↑ Such as the sort you could have if it were 1987 and the credit support annex hadn't been invented.
